WINMARK CORP (WINA)

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Overview

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Winmark – the Resale Company is focused on sustainability and small business formation. As of June 27, 2026, we had 1,389 franchises operating under the Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round brands. Our business is not capital intensive and is designed to generate consistent, recurring revenue and strong operating margins.

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The financial criteria that management closely tracks to evaluate current business operations and future prospects include royalties and selling, general and administrative expenses.

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Our most significant source of franchising revenue is royalties received from our franchisees. During the first six months of 2026, our royalties increased $2.9 million or 8.1% compared to the first six months of 2025.

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Management continually monitors the level and timing of selling, general and administrative expenses. The major components of selling, general and administrative expenses include compensation and benefits, marketing and advertising, professional services, and occupancy. During the first six months of 2026, selling, general and administrative expenses increased $1.4 million, or 9.6% compared to the first six months of 2025.

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Management also monitors several nonfinancial factors in evaluating the current business operations and future prospects including franchise openings and closings and franchise renewals. The following is a summary of our net store growth and renewal activity for the first six months ended June 27, 2026:

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Renewal activity is a key focus area for management. Our franchisees sign 10-year agreements with us. The renewal of existing franchise agreements as they approach their expiration is an indicator that management monitors to determine the health of our business and the preservation of future royalties. During the first six months of 2026, we renewed 50 of the 50 franchise agreements available for renewal.

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Our ability to grow our operating income is dependent on our ability to: (i) effectively support our franchise partners so that they produce higher revenues, (ii) open new franchises, and (iii) control our selling, general and administrative expenses.

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Results of Operations

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The following table sets forth selected information from our Consolidated Condensed Statements of Operations expressed as a percentage of total revenue:

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Comparison of Three Months Ended June 27, 2026 to Three Months Ended June 28, 2025

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Revenue

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Revenues for the quarter ended June 27, 2026 totaled $22.0 million compared to $20.4 million for the comparable period in 2025.

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Royalties and Franchise Fees

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Royalties increased to $20.1 million for the second quarter of 2026 from $18.7 million for the second quarter of 2025, a 7.8% increase. The increase is primarily from higher franchise retail sales and, to a lesser extent, from having additional franchise stores in the second quarter of 2026 compared to the same period in 2025.

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Franchise fees of $0.4 million for the second quarter of 2026 were comparable to $0.3 million for the second quarter of 2025.

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Leasing Income

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We had no leasing income for the second quarter of 2026 compared to $46,600 for the same period in 2025. As of December 27, 2025, the previously announced run-off of the leasing portfolio was completed and we no longer have any leasing customers or leased assets.

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Merchandise Sales

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Merchandise sales include the sale of product to franchisees either through our Computer Support Center or through the Play It Again Sports buying group (together, “Direct Franchisee Sales”). Direct Franchisee Sales of $0.9 million for the second quarter of 2026 were comparable to $0.8 million in the same period of 2025.

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Cost of Merchandise Sold

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Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold of $0.8 million for the second quarter of 2026 was comparable to $0.8 million in the same period of 2025. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the second quarter of 2026 and 2025 was 95.3% and 95.4%, respectively.

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Selling, General and Administrative

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Selling, general and administrative expenses increased 13.9% to $7.5 million in the second quarter of 2026 compared to $6.6 million in the same period of 2025. The increase was primarily due to an increase in compensation related expenses for the Company’s investments in technology and marketing, the timing of advertising production expense, and outside services.

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Interest Expense

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Interest expense of $0.6 million for the second quarter of 2026 was comparable to $0.6 million for the second quarter of 2025.

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Income Taxes

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The provision for income taxes was calculated at an effective rate of 21.2% and 16.6% for the second quarter of 2026 and 2025, respectively. The increase is primarily due to less tax benefits on the exercise of non-qualified stock options during the second quarter of 2026 compared to the second quarter of 2025.

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Comparison of Six Months Ended June 27, 2026 to Six Months Ended June 28, 2025

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Revenue

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Revenues for the first six months of 2026 totaled $42.8 million compared to $42.3 million for the comparable period in 2025.

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Royalties and Franchise Fees

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Royalties increased to $39.4 million for the first six months of 2026 from $36.4 million for the first six months of 2025, an 8.1% increase. The increase is primarily from higher franchise retail sales, and, to a lesser extent, from having additional franchise stores in the first six months of 2026 compared to the same period in 2025.

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Franchise fees of $0.8 million for the first six months of 2026 were comparable to $0.7 million for the first six months of 2025.

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Leasing Income

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We had no leasing income for the first six months of 2026 compared to $2.4 million for the same period in 2025. Leasing income in the first six months of 2025 reflected the settlement of customer litigation. As of December 27, 2025, the previously announced run-off of the leasing portfolio was completed and we no longer have any leasing customers or leased assets.

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Merchandise Sales

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Merchandise sales include the sale of product to franchisees either through our Computer Support Center or through the Play It Again Sports buying group (together, “Direct Franchisee Sales”). Direct Franchisee Sales decreased to $1.5 million for the first six months of 2026 compared to $1.7 million in the same period of 2025. The decrease is primarily due to a decrease in technology purchases by our franchisees.

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Cost of Merchandise Sold

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Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold decreased to $1.4 million for the first six months of 2026 compared to $1.7 million in the same period of 2025. The decrease is due to a decrease in Direct Franchise Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the first six months of 2026 and 2025 was 95.0% and 94.8%, respectively.

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Selling, General and Administrative

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Selling, general and administrative expenses increased 9.6% to $15.4 million in the first six months of 2026 compared to $14.0 million in the same period of 2025. The increase was primarily due to an increase in compensation related expenses for the Company’s investments in technology and marketing.

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Interest Expense

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Interest expense of $1.2 million for the first six months of 2026 was comparable to $1.2 million for the first six months of 2025.

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Income Taxes

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The provision for income taxes was calculated at an effective rate of 21.6% and 20.4% for the first six months of 2026 and 2025, respectively. The increase is primarily due to lower tax benefits on the exercise of non-qualified stock options during the first six months of 2026 compared to the first six months of 2025.

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Segment Comparison of Three Months Ended June 27, 2026 to Three Months Ended June 28, 2025

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Franchising Segment Operating Income

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The franchising segment’s operating income for the second quarter of 2026 increased to $13.6 million from $13.0 million for the second quarter of 2025. The increase in segment contribution was due to increased royalty revenues, partially offset by an increase in selling, general, and administrative expenses.

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Other Operating Segment Income

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The other operating segment income for the second quarter of 2026 was $0 compar

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ITEM 7:     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements and should be read in conjunction with those consolidated financial statements. This section of this 10-K generally discusses 2025 and 2024 items and year-to-year comparisons between 2025 and 2024. Discussions of 2023 items and year-to-date comparisons between 2024 and 2023 that are not included in this Form 10-K, can be found in ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 28, 2024.

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Overview

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Winmark – the Resale Company is focused on sustainability and small business formation. As of December 27, 2025, we had 1,378 franchises operating under the Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round brands. Our business is not capital intensive and is designed to generate consistent, recurring revenue and strong operating margins.

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The financial criteria that management closely tracks to evaluate current business operations and future prospects include royalties and selling, general and administrative expenses.

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Our most significant source of franchising revenue is royalties received from our franchisees. During 2025, our royalties increased $4.2 million or 5.8% compared to 2024.

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Management continually monitors the level and timing of selling, general and administrative expenses. The major components of selling, general and administrative expenses include compensation and benefits, marketing & advertising, professional services, and occupancy. During 2025, selling, general and administrative expense increased $3.4 million, or 13.7%, compared to the same period last year.

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Management also monitors several nonfinancial factors in evaluating the current business operations and future prospects including franchise openings and closings and franchise renewals. The following is a summary of our net store growth and renewal activity for the fiscal year ended December 27, 2025:

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Renewal activity is a key focus area for management. Our franchisees sign 10-year agreements with us. The renewal of existing franchise agreements as they approach their expiration is an indicator that management monitors to determine the health of our business and the preservation of future royalties. In 2025, we renewed 98% of franchise agreements up for renewal. This percentage of renewal has ranged between 98% and 99% during the last three years.

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Our ability to grow our operating income is dependent on our ability to: (i) effectively support our franchisees so that they produce higher revenues, (ii) open new franchises, and (iii) control our selling, general and administrative expenses. A detailed description of the risks to our business along with other risk factors can be found in Item 1A “Risk Factors”.

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In May 2021, we made the decision to no longer solicit new leasing customers and will pursue an orderly run-off of our leasing portfolio. Leasing income net of leasing expense for the fiscal year of 2025 was $2.6 million compared to $1.8 million in 2024. $2.2 million of the $2.5 million of leasing income for the fiscal year of 2025 was related to the settlement of outstanding customer litigation. As of December 27, 2025, the run-off of the portfolio was completed as we no longer had any leasing customers or leased assets. See Note 3 – “Leasing Operations” for information regarding the lease portfolio.

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Results of Operations

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The following table sets forth selected information from our Consolidated Statements of Operations expressed as a percentage of total revenue and the percentage change in the dollar amounts from the prior period:

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Revenue

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Revenues for the year ended December 27, 2025 totaled $86.1 million compared to $81.3 million in 2024.

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Royalties and Franchise Fees

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Royalties increased to $76.4 million for 2025 from $72.2 million for the same period in 2024, a 5.8% increase. The increase is primarily from higher franchise retail sales and from having additional franchise stores in 2025 compared to 2024.

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Franchise fees of $1.5 million for 2025 were comparable to $1.5 million for 2024. Franchise fees include initial franchise fees from the sale of new franchises and transfer fees related to the transfer of existing franchises. Franchise fee revenue is recognized over the estimated life of the franchise, beginning when the franchise opens. An overview of retail brand franchise fees is presented in the Operations subsection of the Business section (Item 1).

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Leasing Income

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Leasing income increased to $2.6 million in 2025 compared to $1.8 million for the same period in 2024. The increase is primarily due to the settlement of outstanding customer litigation when compared to the same period last year.

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Merchandise Sales

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Merchandise sales include the sale of product to franchisees either through our Computer Support Center or through the Play It Again Sports buying group (together, “Direct Franchisee Sales”). Direct Franchisee Sales decreased to $3.3 million in 2025 from $3.6 million in 2024. The decrease is due to a decrease in technology purchases by our franchisees.

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Cost of Merchandise Sold

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Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold decreased to $3.1 million in 2025 from $3.4 million in 2024. The decrease was due to a decrease in Direct Franchisee Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for 2025 and 2024 was 94.6% and 93.8%, respectively.

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Selling, General and Administrative Expenses

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Selling, general and administrative expenses increased 13.7% to $28.4 million in 2025 from $24.9 million in 2024. The increase was primarily due to an increase in compensation related expenses and a non-recurring expense related to third-party software licenses for franchisees.

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Interest Expense

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Interest expense was $2.4 million in 2025 compared to $2.9 million in 2024. The decrease is primarily due to lower average corporate borrowings when compared to last year.

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Income Taxes

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The provision for income taxes was calculated at an effective rate of 21.6% and 22.0% for 2025 and 2024, respectively. The decrease is primarily due to higher tax benefits on the exercise of non-qualified stock options.

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Segment Comparison of Fiscal Years 2025 and 2024

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As of December 27, 2025, we have one reportable operating segment, franchising, and one non-reportable operating segment. The franchising segment franchises value-oriented retail store concepts that buy, sell and trade merchandise. The non-reportable operating segment includes our equipment leasing business. Segment reporting is intended to give financial statement users a better view of how we manage and evaluate our businesses. Our internal management reporting is the basis for the information disclosed for our operating segments. The following tables summarize financial information by segment and provide a reconciliation of segment contribution to income from operations:

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Revenues are all generated from United States operations other than franchising revenue from Canadian operations of $7.8 million and $7.3 million in each of fiscal 2025 and 2024, respectively.

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Franchising Segment Operating Income

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The franchising segment’s 2025 operating income increased by $0.5 million, or 0.9%, to $52.1 million from $51.6 million for 2024. The increase in segment contribution was primarily due to increased royalty revenues, partially offset by an increase in selling, general, and administrative expenses.

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Other Segment Operating Income

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The other segment operating income for 2025 increased by $1.2 million, or 89.7%, to $2.5 million from $1.3 million for 202

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